The IRS will accept an offer-in-compromise to settle unpaid accounts for less than the amount owed when there is doubt that the liability can be collected in full and the amount you offer reasonably reflects collection potential. We file a six to ten page legal memorandum in all OICs that we file with the IRS. The legal memorandum cites section 7122 of the IRS Code that authorizes the IRS to reduce any tax liability. In addition, the memorandum cites the regulations under the statute, the relevant portions of the Internal Revenue Manual, and the Congressional tax policy in OIC cases. It it important to emphasize, for example, the fact that the Congress told the IRS to have a liberal acceptance policy is processing OIC cases. Our legal memorandum also cites the Congressional tax policy to settle your tax liability to give taxpayers a fresh start.
We want to make sure that the IRS clerk processing the OIC knows the law, its own Manual, the tax policy and the legislative history. We want the IRS to know that you have strong representation; thus, eliminating any potential abuse of power, abuse of discretion, and/or misapplication of the law and their administrative rules. The IRS takes extreme positions in OIC cases, and strong representation is critically necessary. The IRS will consider exceptions to their normal "reasonable collection potential" standards - those exceptions are "special circumstances" The legal memo is used to articulate and document those "special circumstances." We know and understand those "special circumstances" from the experience we have in working thousands of OIC cases throughout the United States. Those "special circumstances" depend on the facts and circumstances in individual cases.
The IRS will also consider doubt as to liability and effective tax administration as the basis for abatement. The issue of "liability" is a complex legal issue (e.g., whether a person is a "responsible person" to pay the payroll taxes) requiring sophisticated and well reasoned issues of fact and law.
"Effective tax administration" ("ETA") is based on "hardship" principles. IRS settlement/reduction/elimination of your tax liability under ETA principles are authorized by law even if you have the income or assets to fully pay your tax liability from your income or assets. Although there are some tax regulations on ETA considerations, our large volume of OIC cases has given us special insight into tax settlements based upon ETA. The IRS is loathe to approve settlements in ETA OIC cases, contrary to the intent of Congress. Extremely strong representation is necessary in these cases.
To submit an offer-in-compromise you must complete Form 656; complete instructions are provided on the form. Also, you must submit Form 433-A, Collection Information Statement for Individuals, or Form 433-B, Collection Information Statement for Businesses, if the basis of the offer is doubt that the liability can be collected in full. These forms provide a statement of your income, expenses, assets, and liabilities.
The IRS will not process an OIC for those working as employees unless all unfilled tax returns are filed, although it is not required that you make payment with the tax returns you file. This means that "employees" need to file all unfilled tax returns if you are considering eliminating your tax liability in an OIC. The IRS cannot settle a tax liability for which there is no tax assessment. Filed tax returns are important because they result in an IRS tax assessments. The OIC will function on your aggregate tax liability from the assessments they make against you once those tax returns are filed. For those 1099 persons who are self-employed, the IRS requires that you file quarterly tax returns. Self-employed persons will be considered in compliance (for purposes of filing an OIC) if they file their quarterly tax returns "timely" (e.g. not late in making payment) for the current quarter and the preceding two quarters.
An OIC is submitted on Form 656, Offer in Compromise. The Form 656 is a complete information package, also containing Forms 433-A and 433-B, Collection Information Statements, as well as instructions and a worksheet. Taxpayers should use the July 2004 version of Form 656.
The Form 656 was redesigned in 2004 in order to assist taxpayers in the correct preparation of an OIC, as well as reduce the burden associated with the process. The form was last revised in May 2001. The 2004 revision is the culmination of a partnership effort among the IRS, National Taxpayer Advocate, as well as a number of tax professional organizations
Tax practitioners and the general public should begin using the 2004 revision immediately.
The 2004 revision contains several tax burden reduction features:
Section 7203 of the Internal Revenue Code permits the IRS to charge you with the "willful failure to file a tax return." The statute subjects you to a risk of being guilty of a misdemeanor and a $25,000 penalty ($100,000 in the case of a corporation), and imprisoned for not more than one year. If the failure to file is "willful" the charge is a "felony" and the imprisonment is up to five years.
YOU ELIMINATE THE RISK OF IMPRISONMENT IF YOU VOLUNTARILY FILE YOUR TAX RETURNS, and payment of your tax liability.
The IRS will also not process an OIC if you are currently in bankruptcy.
Collection Financial Standards are used to help determine a taxpayer's ability to pay a tax debt. The allowed amounts are used in the Form 433-A
Necessary Expenses are the allowable payments taxpayers make to support their own and their family's health and welfare and/or the production of income. However, this expense allowance does not apply to business entities.
National Standards, apply nationwide except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.
Form 656, Offer in Compromise (PDF format)
Forms 433, Collection Information Statements
The Forms 433-A and 433-B are included< with the Form 656 package. Taxpayers use these forms to submit financial information that is used to determine their ability to pay their tax debt. Individual taxpayers and self-employed individuals must use Form 433-A, while partnerships and corporations must use Form 433-B. Note: There will be instances where the IRS may request the 433-A from corporate officers or individual partners.
Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals (PDF format)
Form 433-B, Collection Information Statement for Businesses (PDF format)
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If the required documentation is not submitted with Forms 656 and 433-A or 433-B, the IRS will issue one written request to the taxpayer asking for the missing information. If the information is not provided within 30 days, the OIC case is closed and returned to the taxpayer without the opportunity to appeal the decision. It is the taxpayer's responsibility to ensure the IRS has the required information to make its determination on an OIC, as well as provide additional information when the IRS requests it.